Download PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,

PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
Current Economic Developments - May 12, 2004
Data since your last Directors' meeting show the economy expanded in the first quarter
of 2004.
During the first quarter, real GDP posted a gain led by growth in consumption, equipment
and software, government spending, exports, and inventory investment. Imports, which
are subtracted from GDP, also increased.
Non-farm payroll employment increased significantly in April, and the unemployment rate
fell one-tenth of a percentage point. Initial claims remained at their three-year low of 350
throughout the month of April. Consumer attitudes saw little change as personal income
and consumption increased, but auto sales fell in April. Housing starts declined in the first
quarter, while building permits changed only slightly from the fourth quarter.
Despite the continuous rise in energy prices, inflation risks remain minimal as core
consumer and producer prices showed little change in the first quarter. The ECI saw its
biggest increase in a year due to rising pension benefit costs.
In the business sector, durable goods and leading indicators continued to increase, and the
ISM index has remained above 50 for the last twelve months. However, the U.S. deficit in
international trade reached a record level in the first quarter as the average oil price hit its
highest peak in over 20 years.
Real GDP rose in the first quarter, led by consumer and government spending,
business investment, exports, and inventory investment.
Real Gross Domestic Product
Annualized Percent Change
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
01:Q1
01:Q2
01:Q3
01:Q4
Source: Bureau of Economic Analysis.
02:Q1
02:Q2
02:Q3
02:Q4
03:Q1
03:Q2
03:Q3
03:Q4
04:Q1
Real consumption and real disposable income increased in the first quarter as
consumers continued to spend.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
4.0
8.0
7.0
3.0
6.0
2.0
Personal Income
5.0
1.0
4.0
3.0
0.0
Real Disposable Income
2.0
-1.0
1.0
0.0
01:Q1 01:Q3 02:Q1 02:Q3 03:Q1 03:Q3 04:Q1
01:Q1
02:Q1
01:Q3
-2.0
04:Q1
03:Q1
02:Q3
03:Q3
Source: Bureau of Economic Analysis.
Businesses continued to invest in equipment and software, although at a slower pace
than the fourth quarter. Residential investment also slowed from its third and fourth
quarter pace.
Residential Investment
Business Investment
Annualized Percent Change
Annualized Percent Change
25.0
20.0
Equipment and
Software
20.0
10.0
15.0
10.0
0.0
Business Investment
5.0
-10.0
0.0
-5.0
-20.0
01:Q1
01:Q4
02:Q3
Source: Bureau of Economic Analysis.
03:Q2
04:Q1
01:Q1
01:Q4
02:Q3
03:Q2
04:Q1
Government spending increased in the first quarter, due in part to a 15.1% increase
in national defense spending. Although slower than the fourth quarter, exports and
imports rose in the first quarter.
Exports and Imports
Government Spending
Annualized Percent Change
Annualized Percent Change
30.0
8.0
Exports
6.0
20.0
4.0
Imports
10.0
2.0
0.0
0.0
Government spending and
investment
-2.0
-10.0
Contribution to Real GDP
-4.0
-6.0
01:Q1
01:Q4
02:Q3
03:Q2
01:Q1
04:Q1
01:Q4
02:Q3
03:Q2
-20.0
04:Q1
Source: Bureau of Economic Analysis.
In the labor market, nonfarm payroll employment increased sharply for the second
consecutive month in April, and the unemployment rate dropped to 5.6%. Initial
claims continued to hover around 350,000.
Initial Claims
Nonfarm Payroll Employment
Percent
6.0
Change from Previous Month
Thousands of Units at Annual Rates
300
475
400
6.5
Unemployment
Rate
500
200
450
Four-Week
Moving
Average
Ending May
1st, 343,250
100
5.5
0
425
400
5.0
-100
375
-200
4.5
Payroll Employment
4.0
Apr-2001
350
-300
325
-400
Apr-2002
Apr-2003
Apr-2004
Nov-00
Jan-02
Mar-03
May-04
Source: Bureau of Labor Statistics (employment) and the Department of Labor, Employment and Training Administration (claims).
Consumer attitudes were mixed in April as concerns about the health of the job
market lingered.
Consumer Confidence and Expectations
Index, 1985 = 100
140
Confidence
Expectations
120
100
80
60
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
40
Apr-04
Oct-03
Consumer Sentiment and Expectations
Index, 1966:Q1=100
110
Sentiment
100
Expectations
90
80
70
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
Oct-03
60
Apr-04
Source: The Conference Board (confidence) and University of Michigan (sentiment).
As consumer attitudes remained mixed, autos sales slowed somewhat in April
compared to March.
Total Auto and Light Truck Sales
Millions of Units, Annualized
21.0
20.0
19.0
18.0
17.0
16.0
15.0
Apr- 1
Aug-01
Dec-01
Apr-02
Source: Federal Reserve, Board of Governors.
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Housing starts fell in the first quarter compared to the fourth, however March's 6.4%
increase was its largest gain since May 2003. Building permits saw little change in
the first quarter.
Housing Starts and Building Permits
Thousands of Units, Annualized
2100
Housing Starts
2000
1900
Building Permits
1800
1700
1600
1500
01:Q1
01:Q3
02:Q1
02:Q3
03:Q1
03:Q3
04:Q1
Source: U.S. Census Bureau.
At a quarterly frequency, consumer prices saw little change, although the core index
increased sharply in March, its largest gain since November 2001. Producer prices
fell in the first quarter.
Consumer Price Index
Percent Change, Year-Over-Year
Consumer Price Index,
excluding food and energy
Consumer Price Index
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
01:Q1 01:Q2 01:Q3 01:Q4 02:Q1 02:Q2 02:Q3 02:Q4 03:Q1 03:Q2 03:Q3 03:Q4 04:Q1
Producer Price Index
Percent Change, Year-Over-Year
6.0
Producer Price Index
Producer Price Index,
excluding food and energy
4.0
2.0
0.0
-2.0
-4.0
01:Q1 01:Q2 01:Q3 01:Q4 02:Q1 02:Q2 02:Q3 02:Q4 03:Q1 03:Q2 03:Q3 03:Q4 04:Q1
Source: Bureau of Labor Statistics.
The employment cost index increased 1.1%, the largest gain in a year. The increase
was led by a 2.4% rise in contributions to defined benefit plans, its largest increase in
22 years.
Employment Cost Index
Percent Change, Previous Quarter
2.5
Benefit Costs
2.0
1.5
Total Compensation
1.0
0.5
Wages and Salaries
01:Q1
01:Q2
01:Q3
01:Q4
02:Q1
02:Q2
02:Q3
02:Q4
03:Q1
03:Q2
03:Q3
03:Q4
0.0
04:Q1
Source: Bureau of Labor Statistics.
Productivity accelerated in the first quarter, and labor costs continued to fall on a
yearly basis.
Productivity and Costs
Percent Change, Previous Quarter
15.0
Output Per Hour
10.0
Compensation Per Hour
5.0
0.0
-5.0
Unit Labor Costs
01:Q1
01:Q2
01:Q3
01:Q4
Source: Bureau of Labor Statistics.
02:Q1
02:Q2
02:Q3
02:Q4
03:Q1
03:Q2
03:Q3
03:Q4
-10.0
04:Q1
In April, the ISM index remained above 50 and has been for the last twelve months.
Both the ISM and employment indices rose to their highest levels in over 15 years.
ISM Index
Index (50+ = Economic Expansion)
70.0
65.0
ISM Index
60.0
55.0
50.0
45.0
40.0
Employment Index
Apr-87
Feb-90
Sep-88
Dec-92
Jul-91
Oct-95
May-94
35.0
Aug-98
Mar-97
30.0
Apr-04
Jun-01
Jan-00
Nov-02
Source: National Association of Purchasing Management.
Orders for durable goods remained strong in the first quarter. Orders for these goods
have increased three of the last four months.
Durable Goods Orders
Percent Change, Previous Quarter
6.0
Durable Goods,
New Orders
4.0
2.0
0.0
Capital Goods Nondefense,
Excluding Aircraft
-2.0
-4.0
-6.0
-8.0
01:Q1
01:Q3
Source: U.S. Census Bureau.
02:Q1
02:Q3
03:Q1
03:Q3
-10.0
04:Q1
The index of leading indicators rose in the first quarter, but at a slower pace than the
fourth.
Index of Leading and Coincident Indicators
Percent Change, Previous Quarter
2.0
1.5
Leading Indicators
1.0
0.5
0.0
Coincident Indicators
-0.5
01:Q1
01:Q3
02:Q1
02:Q3
03:Q1
03:Q3
04:Q1
Source: The Conference Board.
In the first quarter, the trade deficit reached a record level as the average oil price hit
its highest level in over 20 years. The trade deficit may cause downward revisions
to the first quarter GDP estimate.
Trade Balance
Domestic Spot Oil Price
Dollars/Barrel
Quartly Average, Billions of Dollars
-28.0
42.0
40.0
-30.0
Week ending
May 11th, 39.6
-32.0
38.0
36.0
-34.0
34.0
32.0
-36.0
30.0
-38.0
28.0
-40.0
26.0
24.0
-42.0
22.0
-44.0
01:Q1
01:Q4
02:Q3
Source: Bureau of Economic Analysis.
03:Q2
-46.0
04:Q1
20.0
18.0
Apr-01
Jan-02
Oct-02
Source: West Texas Intermediate
Jul-03
Apr-04
Overall, the economy continues to expand. While the business sector gains strength,
the labor market and consumer attitudes need to show sustained improvement for
extended growth.
Percent
Short-Term Interest Rates
7.0
6.0
Federal Funds Rate
(effective rate)
5.0
Discount Window
Primary Credit
4.0
2.20
3.0
2.00
1.80
2.0
03:Q2
1.0
03:Q3
03:Q4
04:Q1
Apr-04
pr
-0
4
A
04
:Q
1
03
:Q
4
3
03
:Q
2
4
02
:Q
03
:Q
1
3
03
:Q
Source: Federal Reserve Board of Governors.
02
:Q
02
:Q
2
02
:Q
1
3
01
:Q
4
01
:Q
01
:Q
2
01
:Q
1
0.0